America’s Second Thoughts on Trade

Apr 25 2016

In a presidential run like no other, one surprise is the theme adopted by both parties in the persons of Donald Trump and Bernie Sanders  that trade and globalization have damaged the U.S. It's a radical departure from the pro-trade orthodoxy that has been recited by politicians and the major media stretching back decades, and it has triggered a long overdue debate.

Trump launched the subject when he announced that upon gaining the Oval Office he would immediately raise tariffs to China by 45%. Sanders took Michigan, inveighing against “disastrous trade agreements written by corporate America", blaming Detroit's decline on globalization, and mined the same vein in Wisconsin. The others tried to catch-up. Ted Cruz laments that “we’re getting killed in international trade right now”. Hillary Clinton now promises that America will never again “be at the mercy of what any country is going to do to take advantage of our markets.”

Their messages resonate because indisputably the nation has seen millions of jobs flow overseas from low-wage competition, from deliberate outsourcing by U.S. corporations, and from weak trade policing against so-called "dumping" and currency manipulation. Americans in one town after another have watched American manufacturers either go out of business, hand production to a foreign producer or even ship all their equipment abroad to set up shop there. They have been fully aware that globalization has taken away their jobs and hollowed out their communities, while Republican policy has been caught unaware, focused instead on entitlement reform, tax cuts, repealing Obamacare and pursuing even more trade deals. Trump and Sanders have found what really matters to America's workers.

the good points

Trade has delivered huge benefits, certainly to other countries, pulling hundreds of millions out of poverty. But that claim can't be made for this country, so corporate America and conservative media have found it advisable to speak of trade from the consumer's and not the worker's vantage point. Better to emphasize low prices of imported goods rather than the consequence of lost or lowered wages.

To be sure, those low prices for virtually every category of goods have greatly raised the standard of living for people down the income scale. That stratum has enjoyed 62% more goods than they otherwise could have afforded had only domestically-produced goods been available, says one study. Those more concerned with job loss see it differently. They say that the imports that have brought us the bargain prices at Wal-Mart are what have made it unaffordable for a broad slice of the public to buy anywhere other than Wal-Mart.

Economists believe in trade  83% in a survey by the University of Chicago’s Booth School of Business believe that trade and trade deals are good for America. It's a given of classic economics. One is sure to hear about David Ricardo, the English economist who gave us "comparative advantage", that a country should export what it does best and economically and import what another country does better or cheaper rather than producing everything itself. The result will raise the incomes of both. But that assumes some degree of parity between countries. It is not persuasive when wildly disparate wages make for mostly one-way trade as with China.

There are bright spots to be found, provided one leaves out the negatives and is selective. A former deputy trade representative says in a New York Timesop-ed that, if we leave out China, the U.S. has a trade surplus in manufactured goods with the 20 countries with which we have trade agreements, and a surplus of $200 billion annually in financial services and intellectual property. In 2014 the U.S. chalked up with those partners trade surpluses that ran to $36.4 billion in machinery, $17.7 billion in plastics and $14.3 billion in aircraft, exults The Wall Street Journal in an editorial that makes no mention of job losses. The government promotes trade, too. A Department of Commerce estimate says every $1 billion a year of exports supports nearly 6,000 jobs. Proponents emphasize the heightened economy brought about by exports and the higher wages of export-related jobs  on average 18% higher than jobs involved only with the domestic market.

Promoting trade's blessings leads to some curious twists, such as "Apple could benefit from China’s ample supply of cheap labor" in the Times or "open trade is more crucial for the imports that force U.S. firms to stay competitive" in the Journal. A report from the pro-trade Peterson Institute says that in the seven years from 1994 to 2001, following the passage of the North American Free Trade Agreement, nearly 17 million jobs were added in the U.S. and unemployment dropped to 4%.

But that sweeps in the entire U.S. economy to obscure that when NAFTA is considered on its own, it accounts for a loss for the United States of 700,000 jobs, according the Economic Policy Institute's estimate. Pro-NAFTA groups, such as conservative think tanks and the U.S. Chamber of Commerce, minimize the trade deficit with Mexico and Canada. They count the value of re-exports to inflate total export dollars, reports the non-profit organization Public Citizen. Re-exports are imports from other countries  of no jobs benefit to the U.S.  that are built into products that the U.S. then exports to our two neighbors. When re-exports are taken out of the dollar export tally, the $86 billion trade deficit bandied about by those groups rises to a negative $177 billion.

let them eat food stamps

Free trade  the elimination of trade barriers around the world  will see wages of all nations converge toward the mean. That's what has lifted scores of millions out of poverty around the world. For the U.S., the convergence has inevitably had the opposite effect, with higher wage jobs disappearing to other countries, leaving a residue of lower wage jobs at home. Adjusted for inflation, wages of blue-collar workers in manufacturing have been stagnant for the last 35 years, whereas productivity in that sector has rocketed by 200%. Businesses and owners have kept the gains to themselves.

That seems not to bother free trade
advocates for whom it is adequate that we broaden the safety net and "design well-targeted supports for workers and communities that need help"  as if words solve the problem. They do not look back to discover that unemployment insurance, trade adjustment assistance, the earned-income tax credit and job re-training are insufficient to make the problem go away long-term. Plant closures in fact hollow out towns and nothing comes along to fill the void.

Trade advocates ask why workers don't simply move to where the jobs are, with little empathy for how frightening that can be for a family without transferable skills, who know little of job markets, where those jobs might be found and have precious little money to pay the cost of a long distance move.

the wealth transfer

NAFTA has at least yielded the political benefit of improving the economy of Mexico on our border. China is another matter. It is China that has had a devastating effect on the U.S. since its acceptance into the World Trade Organization in 2001. They are not a trading partner  no trade pact exists between China and the U.S. Their posture is entirely mercantilist: to sell as much as possible to other countries while doing as much as possible to block or hinder other countries from selling to China. That shows up clearly when trade with China is compared to Mexico. In 2014, U.S. exports to China were just 27% of imports; the comparable figure for Mexico was 82%.

China views itself as justified in taking whatever steps are needed to raise up their country, and that has meant theft of U.S. intellectual property, counterfeiting, cyber-theft of American companies' trade secrets, illegal subsidizing of industries, the forced transfer of technology by U.S. corporations as the price of doing business in China, and currency manipulation.

As foreseen before China gained membership, the People's Republic skirts WTO rules. The U.S. has had to impose one after another tariff on Chinese imports across the last decade to counter illegal government subsidies to their industries and pricing of manufactures at below cost to destroy competitors. "Countervailing" duties designed to offset unfair practices have been imposed by the U.S. on paper, steel, tires, chemicals, solar cells, wind turbines.

misled by experts

And yet, economists have shown bewilderment for why wages in the U.S. have stagnated for decades while all the gains have gone to the top tier of earners. They have been wedded to the dogma that, while there are some imbalances, trade is good, while all around them has been the evidence that trade has been very bad to a huge swath of the American public.

As Japan began in the 1970s to take market share in autos from us and the manufacture of virtually all home electronics, economists said this freed workers to move up to higher skilled and higher paying work. Then, when white collar jobs began to go abroad as well  accounting, paralegal, call centers, for example  they continued to say the same. Blinded by what the French call déformation professionnelle, a tendency to look at the world from the point of view of one's own profession, they failed to see the obvious: the higher up the skill ladder, the less jobs there are, far from enough to accommodate the vast number of displaced workers. Thousands once manned our factory floors, but the engineers and designers of the products they built numbered only in the hundreds.

The mythology won't die. A current Journalopinion piece by political commentator Morton Kondracke and Tuck Business School professor Matthew Slaughter heralds the effect of industry loss from trade as "creative destruction". Foreign competition forces "the movement of people and capital from weaker businesses to stronger ones and new opportunities". But with few exceptions, we are no longer "abandoning industries and replacing them with new ones", objected one reader. "It’s a whole class of people who are being let go. How do we find replacement work for workers at a certain level across almost every industry?"

His view is supported by a recent study from David Autor at the Massachusetts Institute of Technology, David Dorn at the University of Zurich and Gordon Hanson at the University of California, San Diego. They examined what happened to jobs in areas of the country affected by the competition from China that arose beginning two decades ago. The shift from "weaker businesses to stronger ones" never happened.

Low wages and persistent unemployment was the shift, with no indication of workers moved into more advanced industries. The trio urges that the case for free trade not be "based on the sway of theory alone, but on a foundation of evidence that illuminates who gains, who loses, by how much, and under what conditions.”

These findings say that government funding of new industry development such as subsidies for wind, solar and alternate fuels  what conservatives cynically dismiss as "picking winners and losers" while speaking only of "growth" from some unspecified quarter  should be considered as a necessity.

Jared Bernstein, a former adviser to Vice President Biden and now at the Center on Budget and Policy Priorities, writes at the Times, "We should no longer buy the statistically strained arguments about [trade agreements] delivering growth and jobs. The evidence just isn’t there, a fact not lost on those campaigning for president."

outing the truth

Enter Donald Trump to send tremors through the foundation of Republican trade dogma. He has repeatedly faulted the Obama government for striking terrible trade deals  deals such as the Trans Pacific Partnership that Republicans solidly back, but which Trump calls the worst he's ever seen. "We're checkers players against grandmaster negotiators". Foreigners are "killing us on trade", he has said. "They're beating us so badly. Every country we lose money with". He said to The Daily News last summer, “Our trade deficit with China"  $366 billion last year, a record  "is like having a business that continues to lose money every single year. Who would do business like that?”

He has lambasted Ford for expanding in Mexico and Carrier for announcing the move of its Indianapolis operations to Monterrey, Mexico. Doctrine says that while 1,400 unfortunately will lose their jobs, some of them after working for Carrier for decades, the rest of America will benefit by the ability to buy cheaper air conditioners. But the cumulative result of the transfer over and over to low wage factories overseas is a loss of some five million America jobs between 1995 and 2015, a plunge of 28%.

Trump's 45% levy against China is, of course, unrealistic, but his harangue against America's timidity in striking tougher deals and the damage that soft policy has wrought turned the simmering resentment of America's blue-collar workers into a full boil.

The U.S. has recourse. There is Section 301 of the Trade Act of 1974 which authorizes action against the trade practices of a foreign government and does not require that we first obtain the agreement of the World Trade Organization. WTO disputes seem always to take more than a year before a ruling is handed down, by which time competition has often driven U.S. firms out of business. Our government should act first, immediately imposing a tariff or quota or outright prohibition, and if later ruled against, pay the fines, having in the meantime protected companies here. The most flagrant case of U.S. laxity was the solar industry, a U.S.-invented technology which we allowed to be completely taken over by China.

The Obama administration refused for years to take action against China's currency manipulation, by which they kept their goods cheap to increase exports. Because of its economic troubles, China is at it again, and the U.S. does nothing. Under Section 301 we should invoke an across the board tariff on all goods to offset the degree of the currency tampering.

Ah, but China will retaliate in turn, is the standard response. Behind that is the lobbying of U.S. companies doing business in China that would probably be the targets of retaliation. But that should be their risk of choosing to operate in China. Instead our kept politicians opt to do nothing and let the risk fall on American companies.

bleeding out

The more troubling result of allowing trade deficits to persist is the loss of American assets, as countries, especially China, return their trade surpluses to this country to buy our corporations, land and resources. Bought off by U.S. multinational businesses concerned only with the profits of selling to China's, successive administrations and lawmakers take no action to force trade into balance lest there be repercussions harming their donor clients. As the years roll by the consequences could be ruinous.

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1 Comment for “America’s Second Thoughts on Trade”

The imposition of high tariffs in the 1930s is what turned a stock market downturn into a long lasting worldwide depression.

We are in the midst of an unstoppable transformation in production methods that is making traditional factories obsolete for many types of goods. That is releasing a lot of people to do new things. The question is what?

Our factory-like school system is good at turning out minimally creative cogs for a factory system which could to consume a person’s entire working life. It’s graduates are completely unprepared for a world of small entrepreneurs, whose enterprises may be relatively short-lived.

Young people will probably adapt in spite of the school system. The question is what to do with older people with the entrenched feeling that they cannot be anything other than employees?

In other words, the problem is more one of repairing our psychology than trying to fight an unwinnable war.

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